Accidental Profits

An intriguing, not-so-little company called Marchex was in the news this week, announcing a remarkable feat: the simultaneous launch of 100,000 new web sites. This announcement comes on the heels of a glowing article in the New York Times about another company called NameMedia which owns a stunning 2 million+ websites.

What's going on here? These are just two of the better known players in the so-called "direct navigation" space. There are other, less friendly names for this business of operating generic domain names and even common misspellings of popular domains, and loading them up with ads and paid links.

Apparently, some 5-10% of all Internet users eschew search engines in favor of guessing where their desired content can be found. They "direct navigate" by typing in their best guess at a domain name. It's a strange way to try to access information, but then again, a similar percentage of Internet users go to search engines and search on domain names to help get to the domain name they just entered.

Intriguingly, the search engines have an ambiguous relationship with these firms, on the one hand trying to reduce their search engine result rankings because of the content-free nature of their sites, and on the other hand paying them large amounts of money to run third- party advertising for them. Visitors to these sites have a similarly ambiguous relationship. Many of us curse when we accidentally land on one of these sites, but enough apparently find value and click on some of this paid advertising to make Marchex a $100 million business, and to allow NameMedia to raise over $125 million in venture capital.

What we are seeing in this recent Marchex launch of 100,000 sites is a new "flight to quality" on its part, at least on a relative basis. These new sites contain relevant yellow pages listings, reviews, and other content scraped from the web using sophisticated software. The name of the game is to provide as much useful content as possible with no human editorial intervention. That's because people cost money, and these companies generate their handsome margins by providing the minimum amount of useful information they can get away with at as little a cost as possible.

I have never really known what to make out of companies like these. It's clearly a bottom feeder business model, but it can and does make money. Moreover, it's clearly a case where value is in the eye of the beholder. I get little value from them, but if they help lots of unsophisticated web users get to the destinations they might never have found otherwise, what's the harm? It's only when this type of company tries to game the search engines by representing that their sites contain true destination content that they cross the line.

Perhaps what's most telling of all is even these companies are now feeling the pressure to deliver more value in the form of upgraded content. As these companies find that higher quality content results in more traffic and more click-throughs, they will continue to upgrade content and in the process turn into mainstream online content companies. That won't be good for their margins, but it will again prove that at the end of the day, there is no substitute for quality content. And that's no accident.